8 popular investment myths debunked
Today I am going to debunk a few popular investment myths.
After reading through these myths you will know why individual investors fail miserably in achieving their financial goals and how you can avoid being one of them.
1. I am too young to plan for retirement
Have you started planning for your retirement? You may be saying 'who me? I am too young to be thinking about retirement". It is not so! Rethink.
You should have started thinking about it yesterday. Because time flies quickly.
If you were smart, and planned for retirement when you are young, your retirement years will be really those 'Golden years'. If not you need to compromise and you need to work longer and retire later than others.
Ramalingam K, an MBA (Finance) and certified financial planner, is founder & director of Holistic Investment Planners (P) Ltd. He can be reached at firstname.lastname@example.org.
Photographs: Rediff Archives
2. East or west, FDs are safest and the best
Nothing wrong in investing in fixed deposits. FDs are really safe and they give fixed returns too.
But there is no meaning in investing all your money in FDs.
The post tax return on an FD will hardly beat inflation.
If your investments are not beating inflation, then your money is losing its purchasing power. FDs are safe but not always the best option.
3. I can never be as good as Warren Buffet or Rakesh Jhunjhunwala so why try?
In the words of Warren Buffet 'Success in investing doesn't correlate with IQ once you're above the level of 125. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing'.
You don't need a super brain for making investment decisions.
You only need common sense and discipline.
If you don't have enough time and expertise, then you can get assistance from professional financial planners.
Image: Berkshire Hathaway chairman Warren Buffett plays table tennis using a giant paddle.
Photographs: Rick Wilking/Reuters
4. Stock markets can earn me quick bucks
This is a common myth among investors. Stock market will reward the long-term investors.
Stock market is a system that transfers money from investors who are fearful and greedy to investors who are balanced and rational.
You need to be calm, patient, disciplined, and rational. You don't have to be smarter than the rest; you have to be more disciplined than the rest.
5. Timing the market is important
Investors often spend a lot of their time in trying to identify when the market is very low or high, and timing the purchase and sale of investments accordingly.
In other words, they want to time their exit when the market has reached its top and time their entry when the market has reached a bottom.
This not a practical idea, as there is so many factors influencing the stock market. Predicting all the factors and making investments is practically not possible.Instead of that stagger your investments through systematic investment plans, systematic transfer plans and stay invested for the long term.
6. There is no such thing as too much diversification
Diversification is needed. A well-diversified portfolio can be created with 10 stocks or 3 mutual funds.
Having more than 20 stocks or 6 mutual funds can dilute your returns.
The reason is you are not only investing in best stocks and funds, you are investing in above average and average stocks and funds. So your returns will come down.
Instead of over diversification, you need to concentrate on a few stocks. It is possible to achieve the required diversification with a few stocks or funds.
7. The best way to make money is investing in what is hot
If you are investing in what is hot, then you are following the crowd. If you follow the crowd, you will get what others are getting.
You will not get anything more.
You may have read this a thousand times over. Please bear with me for one more time.
You need to be fearful when others are greedy and you need to be greedy when others are fearful. So don't go by the market trend or the hot pick of the month.
Think like a contrarian and follow value investing.
8. Saving tax is the only objective for me to invest
Which group are you in?
There is a group of people who invest just to save taxes. They will not bother to invest anything more than that. They will meet their objective of saving tax.
There is another group that invests to save tax as well as to save for their other life goals like retirement, children's future.
They will meet the objective of saving tax and achieving other life goals. Kindly check you belong to which group.
You can be an assured successful investor if you could avoid these investment myths.